If a production function has constant returns to scale, it means that if we Select one:...

If a production function has constant returns to scale, it means that if we

Select one:

a. increase capital and labour by 5 percent each, we increase output by 10 percent

b. increase capital and labour by 10 percent each, we increase output by 10 percent

c. increase capital by 10 percent and increase labour by 5 percent, we increase output by 7.5 percent

d. none of the above

Solutions

Expert Solution

The correct answer for the question is option [b] - Increase in capital and labour by 10 percent each , we increase output by 10 %.

REASON:

The production function is said to have a constant returns to scale . If that is so then according to the Cobb-Douglas production function, if the output increases in exact proportion to that of an increase in all the factors of production then the firm is said to have a constant returns to scale.Here,it is said that capital and labour increases by 10% and the output in turn also increases by 10%. So the firms production function has a constant returns to scale.

Option [a] is incorrect because the factors of production increases only by 5% but the output has erractically increased by 10%

Option [c] is also incorrect because the capital increases by 10% andlabour by 5% and output by 7.5%. The factors are not increased at a common rate and thus the output is also not increased in exact proportion to the factors of production.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Which production function illustrates the case of constant returns to scale?

A xY = F (zK, zL) where x <z B zY = F (zK, zL) C yY =F (zK, zL) where y>z Which production function illustrates the case of constant returns to scale? Which production function illustrates the case of decreasing returns to scale? Which production function illustrates the case of increasing returns to scale? The costs of expected inflation include (choose one or more) A shoeleather cost B menu costs C variability in relative prices leading to microeconomic inefficiencies in the...

What is a production function? What is meant by constant returns to scale? What is meant...

What is a production function? What is meant by constant returns to scale? What is meant by diminishing returns? How are factor prices determined in a competitive economy? How does a firm decide how many workers to hire and how much capital to rent? What factors would alter factor rewards and how? What is Euler’s theorem?

a) Do the following production functions exhibit constant returns to scale, increasing returns to scale, or...

a) Do the following production functions exhibit constant returns to scale, increasing returns to scale, or decreasing returns to scale? For full credit, show why. 1) Q= 10L^ 0.5K^0.3 2) Q= 10L^0.5K^0.5 3) Q= 10L^0.5K^0.7 4) Q= min{K, L} b) Which objects pin down a_LC and a_KC? Explain carefully. c) Why does labor being mobile across sectors automatically imply revenue maximization for firms? Explain carefully.

2. Consider the Solow growth model. Suppose that the production function is constant returns to scale...

2. Consider the Solow growth model. Suppose that the production function is constant returns to scale and it is explicitly given by: Y = KaL1-a a. What is the level of output per capita, y, where y = Y/L? b. Individuals in this economy save s fraction of their income. If there is population growth, denoted by n, and capital depreciates at the rate of d over time, write down an equation for the evolution of capital per capita, k,...

Classical theory assumes the economy’s production function exhibits constant returns to scale. An example is the...

Classical theory assumes the economy’s production function exhibits constant returns to scale. An example is the Cobb-Douglas production function presented on pp. 61-62: Y = AKαL1-α MPL = (1 – α)Y/L MPK = αY/K A is greater than zero and measures the productivity of the available technology. The parameter α is a constant between 0 and 1 and measures capital’s share of income. Assume A = 1, α = 0.5, L = 64 and K = 4. Find the values...

Consider a representative firm that faces a constant returns to scale production function Y = zF(K,...

Consider a representative firm that faces a constant returns to scale production function Y = zF(K, Nd ), where Y is output of consumption goods, z is TFP, K is physical capital, and Nd is labour input. The amount of capital is assumed to be given and fixed. The production function exhibits a positive marginal product of labour, as well as diminishing returns to labour. The firm seeks to maximize profits. Suppose that the government imposes an output tax Ty...

Select all of the production functions that exhibit constant returns to scale. Q = min{K,L} Q...

Select all of the production functions that exhibit constant returns to scale. Q = min{K,L} Q = K + L Q = (K + L)2 Q = KL Q = min{2K,3L} Q = K.3L.7 Q = 2K + L

Is there any relationship between returns to scale and economies of scale? Assume a production function...

Is there any relationship between returns to scale and economies of scale? Assume a production function q = 100(K^0.7*L^0.3), where K is capital and L is labor. Derive the marginal product of labor and the marginal product of capital. Show that the marginal product of labor is decreasing (hint: beginning with K = 2, and L = 50)

Question 2 When a firm’s production function exhibits constant returns to scale: the short-run average cost...

Question 2 When a firm’s production function exhibits constant returns to scale: the short-run average cost curve will be horizontal. the long-run average cost curve will be U-shaped. the long-run marginal cost curve will be upward sloping. the short-run average variable cost curve will be downward sloping. the long-run average cost curve will be horizontal.

Suppose constant returns to scale in the production of a particular good, and free entry into...

Suppose constant returns to scale in the production of a particular good, and free entry into the market for that good. Where would we expect the price of that good to end up? What is an isoquant? What is a production function? Say there are DRS. If market supply falls ceteris paribus, what would happen to price? Say there are DRS. If market demand falls ceteris paribus, what would happen to price?

Subjects